FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

  • U.S. economic growth contracted in the first three months of 2022. Real GDP fell 1.4% due largely to a sizeable increase in the trade deficit.
  • The U.S. goods trade deficit widened unexpectedly by almost 18% to hit a new record in March, reflecting both higher import volumes and prices.
  • Personal income and consumer spending rose on a monthly basis in March. While a key inflation measure, the core PCE deflator, eased marginally to 5.2% year/year from 5.3% in February.

U.S. -GDP Drop Obscures Strong Underlying Demand

First quarter GDP was the disappointing marquee release this week, but there were plenty of silver linings in financial news. The consensus was for weak, but still positive, growth. Instead, the U.S. economy retreated by 1.4% annualized, after booming 6.9% in the fourth quarter of 2021 (see here). The unexpected retrenchment was largely due to a widening trade deficit, with slowing inventory accumulation and fading stimulus spending chipping in (Chart 1). The headline decline masked underlying strength in consumer spending and business investment, which posted solid gains of 2.7% and 9.2% respectively in the quarter.

Business investment has good momentum heading into Q2, with durable goods orders up 0.8% month-on-month (m/m) in March, after a 1.7% decline in February. The increase was driven by autos, computers and other electronics. The measure has risen in five of the last six months. The report also showed that a closely watched proxy for business investment – new orders for nondefense capital goods excluding aircraft – rose by 1% m/m, pointing to resilience in the business sector.

On the housing front, data from the S&P CoreLogic Case-Shiller Index showed that home price growth remained robust in February. Prices posted a 19.8% y/y gain, up from 19.1% in January. This was the highest growth rate since August and reflects extremely low levels of inventory relative to demand. As mortgage rates continue to climb, however, purchasing power will dim, resulting in lowered demand which should restore greater equilibrium to the market.

Financial News Chart 1 is a stacked column chart showing contributions to changes in real GDP growth from Q1 2021 to Q1 2022. It shows that in Q1 2022, real GDP contracted by 1.4% largely due to declines in net exports, inventories and government spending.

There are already some indications of this as sales of newly built single-family homes fell in March for the third consecutive month. New home sales were down 8.6% m/m. There was also a decline in contracts signed to purchase homes. Pending home sales headed lower for the fifth consecutive month. The metric fell 1.2% m/m in March, pushing signed contracts to the lowest level since May 2020. As prices and interest rates head higher, and a solid supply of homes under construction are completed, the current imbalance between housing supply and demand should start to close.

There was little sign of improvement in the trade deficit through the quarter, as the monthly deficit hit a new record in March. A surge in imports dwarfed export gains (Chart 2). The goods trade gap rose by 17.8% m/m to $125.3 billion. While strong demand from businesses and consumers lead to a surge in imports, rising prices also contributed to the sizeable increase in the deficit. Front-loading of imports due to geopolitical and supply-chain uncertainty saw sizeable increases in the import of consumer goods (13.6%) and motor vehicles (12%).

Financial News Chart 2 contains two line graphs over the period June 2015 to March 2022 showing U.S. exports and imports of goods. Both goods imports and exports rose in March 2022, however the increase in imports was much larger, resulting in a record high merchandise trade deficit of $125.3 billion.

Finally, both nominal personal income and spending rose in March by 0.5% and 1.1% m/m respectively (see here) in financial news. Accounting for prices, real spending rose 0.2% on the month. The Fed’s preferred inflation gauge, the core personal consumption expenditure deflator, rose 5.2% y/y, a slight deceleration from February. Add it all up, and with inflation still elevated, and strong momentum in consumer spending and business investment, the Fed is expected to look past the headline decline in GDP, and press full steam ahead with policy normalization, with a 50 basis point hike next week.

Shernette McLeod, Economist | 416-415-0413

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